Think you’re supporting your favorite neighborhood restaurants when you open an app to order home delivery? Think again – you might actually be driving them to extinction.
The COVID-19 death toll could reach as high as 25 percent – at least in the restaurant industry.
That’s the sobering prediction from online booking service OpenTable, which noted in mid May that restaurant reservations plunged by 95 percent compared to a year earlier.
In a desperate effort to stay afloat and keep employees on the payroll, restaurants everywhere have scrambled to beef up their delivery business. As a Cause Consumer trying to do something good with your everyday spending, you might be making a conscious effort to step up delivery orders from your favorite neighborhood joints.
But if you’re using so-called marketplace apps like Grubhub, Uber Eats, or DoorDash, you might be killing the very restaurants that you’re trying to save.
The Economics of Delivery
“What we wish that customers understood is that not all of the different online ordering options are equal in terms of their economic impact to us as a restaurant,” says Phil Petrilli, CEO of Taim, a falafel shop with six locations in New York and Washington, DC.
“Businesses like Grubhub, DoorDash and others charge all restaurants a significant commission on every order placed using their technology. That’s money that never makes it to the restaurant — and in a business where margins are already razor thin to begin with, those fees actually can cause restaurants to lose money in fulfilling an order.”
Petrilli is hardly alone in his lament. Marketplace apps represent a Catch-22 for an industry where the average profit margin is just 5 to 10 percent: Restaurants risk losing customers if they don’t maintain a presence on the apps, but the high commissions mean they end up losing money every time they send an order out the door.
Even before the pandemic, those “out the door” orders were increasing, adding to the squeeze on local restaurants. From 2016 to 2022, restaurant delivery as a share of total sales is projected to nearly double, with the overwhelming majority of orders coming from third-party apps like DoorDash and Uber Eats, where commissions routinely top 30 percent.
What does that mean to the bottom line? Take Cluckers, an imaginary chicken restaurant where the average meal costs $15 and the profit margin is a relatively healthy 10 percent. If a diner places a $15 delivery order and Uber Eats charges a 30 percent commission, then the restaurant is losing approximately $3 on that order.
“Suddenly takeout is everything, and restaurant owners realize that it’s not sustainable. Everyone is rushing to fix the problem and stop the bleeding.”
For a brand new customer, that loss can be chalked up to marketing or customer acquisition – much like the cost of an advertisement or a coupon. If that new customer continues to come into the store or places future orders directly through the restaurant website, then the investment pays off.
But the fear in the industry is that millions of consumers have developed the habit of app-based ordering during months of quarantine. If you crave white meat delivered to your door, it’s so easy to open a single app, type in the word “chicken,” and find dozens of options just a click away. No matter how much you liked Cluckers, would you really spend the time to navigate directly to their website on your next order?
When diners start ordering habitually through the delivery apps, then that $3 loss is no longer about customer acquisition. Instead, it becomes an ongoing cost of doing business, and it’s simply not sustainable.
To make matters worse, independent restaurants like Cluckers are the ones taking the biggest hit, because national chains like KFC have the clout to negotiate more favorable terms with app makers. As a KFC official told the Wall Street Journal last year, their commission rate with Grubhub is “nowhere close to 20 to 30 percent.”
Even as the national chains negotiate better terms with the marketplace apps, they’re also leveraging name recognition and huge marketing budgets to encourage adoption of their own branded apps. Panera, for instance, pays zero commission when a customer orders through the Panera app, but it spent an estimated $100 million to develop its robust online platform – the kind of investment no local restaurant could match.
Restaurants Fight Back
Independent restaurateurs aren’t giving up, of course. Most continue to “play ball” with the marketplace apps, simply because they feel that they have no other choice. But the high commissions that used to be a minor irritant now represent an existential threat, and neighborhood eateries are looking to their customers – and alternative technology – for help.
“Takeout used to represent 20 percent of business, so if I’m a restaurant owner, I could live with Grubhub even if I didn’t like them,” says Chris Webb, founder of the restaurant technology platform ChowNow. “Suddenly takeout is everything, and restaurant owners realize that it’s not sustainable. Everyone is rushing to fix the problem and stop the bleeding.”
“Fixing the problem” often means giving consumers the convenience of online ordering without going through the marketplace apps – a matter of both technology and education. Companies like ChowNow, MenuDrive, and Toast are helping small restaurants quickly establish online ordering and delivery capability for a flat, monthly fee that starts around $100, instead of ongoing commissions that can easily reach 20 or 30 times that amount.
ChowNow launched nearly a decade ago with the stated mission of “helping local restaurants thrive.” Today the company handles online ordering for about 17,000 restaurant partners, and Webb says those restaurants saved about $82 million in commission fees last year alone.
It’s no accident that most consumers have never heard of ChowNow or its competitors, because the companies work behind the scenes with “white label” solutions that promote the restaurant brands, rather than the technology provider. Webb says that’s an important part of helping local restaurants thrive.
“All the big marketplace apps want to insert themselves in the middle of the customer relationship because it gives them leverage. We strive to strengthen the relationship between restaurant and diner. Restaurants get the customer data. Restaurants get the brand recognition and brand loyalty. We processed orders for 10 million diners last year, but they probably never knew it. Their relationship was with that local restaurant.”
Technology can do only so much, however. At the end of the day, the survival of local restaurants will depend on consumer choices.
“We push so hard for people to order directly from us,” says Taim’s Petrilli, who uses ChowNow technology for his website and branded app. “When they do, we are not held hostage to the fees charged by those other online ordering systems — and that allows us to keep our prices low while still investing in amazing ingredients, good portions and talented teams in our restaurants serving our guests.”
Four Ways to Help
So what can you do, as a Cause Consumer who cares about jobs and quality of life in your community?
There’s no doubt that the coronavirus pandemic will hasten the demise of many independent restaurants, but as with social distancing, individual choices can help to “flatten the curve.” The fate of your favorite neighborhood eatery could literally be in your (well-washed) hands. Here are four ways you can help:
- Dine in when possible. Restaurants will struggle with mandated capacity limits for the foreseeable future, making it more difficult to snag a table. But onsite dining creates more jobs than takeout or delivery, so it’s worth getting a table when you can.
- Use the big apps for discovery only. Grubhub, Uber Eats, and DoorDash are all great platforms for finding new restaurants that you’ve never heard of. So, go ahead and use the apps for discovery, but once you find new places that you like, then it’s time to…
- Build direct relationships. Help keep your favorite restaurants afloat by ordering directly from their websites or (gasp) picking up the phone. It might take a few more seconds than going through a marketplace app, but that simple choice can make all the difference for a struggling restaurant.
- Try the ChowNow app. If you really love the convenience of a marketplace app, at least try the one from ChowNow. You’ll find “only” about 17,000 restaurants listed there (compared to some 300,000 on DoorDash), but you can rest assured that your entire purchase goes straight to the restaurant — not to some Silicon Valley hedge fund.
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